The Retired Investor: What Can Investors Expect From Coming Era of Populism

We are in the second or third year of a new regime change, according to my calculations. If this one follows the patterns of past periods, some clues of what might occur in the years ahead are available (at least from an economic and financial point of view).

 

Historically, it seems that the most recent period of populism (1964-1982) can give us a better guess of how the stock market might perform. Although there have been many changes in the financial markets since then, many fundamental instruments and assets remain the same.

 

As for the federal government, it has enacted various laws to reign in speculation in the banking system and to protect the consumer after the Financial Crisis of 2008-2009 but continues to preside over what most now believe is a form of state capitalism. The Federal Reserve Bank is largely the same, although with even more power to affect the economy since then. In any case, the Sixties and Seventies are the closest model we have.

 

In the period between 1964 and 1982, stocks went nowhere — except in election years.

 

In those presidential years, stocks on average were up more than 20 percent. This makes some sense from a behavioral perspective. I believe voters were seeking (and hoping) to elect a strong man who would harness government to effect change. This is based on a belief that the only chance to reign in the excesses of capitalism (the rich get richer, and the poor get poorer) is through government intervention. Nothing else is big enough.

 

However, we are an impatient people. We want immediate results. Campaign promises of a fast change in the status quo for the better are assumed.  Unfortunately, that kind of change, as I have said, takes time.

 

As a result, populism has not been good for incumbent presidents. Most presidents have only held single terms during those years. I guess that people are unhappy and quick to blame leaders if the pendulum doesn't swing fast enough. I call it the "throw the bums out" syndrome.

 

If the country truly decides to raise the living standards of most of the American population that has been left behind, it will do so after a lot of kicking and screaming from those who will resist change including most of my readers. The fact remains, however, that the policies of the last forty years must be cast aside. As I hope I have pointed out in this series of articles — they don't work. In their place, policies that put equity, fairness, equality, etc. first for years will require new ways of distributing wealth in this country.

 

On a macroeconomic front, moving from a top-down to a bottoms-up approach by the Fed and the government is going to be an inefficient process. That means we will have to sacrifice optimum economic performance and settle instead for slower growth. I am hoping the rollout of artificial intelligence with all its promise in the years ahead could help alleviate the negative consequences of moving the pendulum back to the center.

 

A bottoms-up approach will likely be inflationary as well because people do not use capital efficiently. They try and better their circumstances in the here and now. Few will wait or save for the opportunities to seek better investment returns, etc. Families will splurge, buying things they don't need with new-found wealth. 

 

If you think the deficit is bad now, once this redistribution begins look out below. Just think how much wealth would have to be redistributed to make America whole again. The debt will skyrocket, and the dollar will plummet. The U.S. will need to take a page out of the emerging market handbook and inflate our way out of a coming debt crisis. If you throw in the country's present love affair with tariffs, we are practically guaranteed a higher inflation rate for years to come.  It will be a messy process at best with a lot of money wasted. 

 

I believe the country has yet to embrace the need for policy change at the level necessary to swing the pendulum. Oh, some of them know what I know, but are simply afraid for their political lives to face the tough choices ahead.  I am sure that just reading this column, many investors are shuddering with the picture I am painting.

 

But what choice do we have? Our government has spent $9 trillion — 10 times the amount of the New Deal — and people are still angry. Tariffs have been tried and have failed throughout our history. Tax cuts for the rich and corporations, more regulations instead of less, trickle down, investment tax credits, higher interest rates, no interest rates, buy America, hate China, these are all 40-year-old bankrupt policies that both sides of the political spectrum are still counting on to fix a problem that requires new thought and direction, and so are you.

 

I see nothing new in the promises of our candidates and suspect that it will take more time, more crises, before individuals yet unknown rise up with policies that will satisfy most Americans. They will have to be courageous and think outside of the box. Some will follow, and most will dig in their heels because they believe they will stand to lose more than they gain.

 

However, it can be done because we have done it before. Out of the chaos of the Civil War, an entire minority of Americans (which represented 20 percent of the labor force at the time), were freed from slavery. The wrenching crisis that was the Great Depression resulted in Roosevelt's New Deal, which transformed American society and gave us benefits that are still viable today. Out of the marches, death, and disillusionment of the Sixties came the programs of the New Society that once again set America on a new path.

 

This one may last beyond my lifetime. It won't be pleasant and by its nature, the road forward will be bumpy, but it is the system that our forefathers created, and it has worked so far. The question is whether we will have the patience, courage, ability to compromise, and willingness to embrace the change necessary to see this through. What say you?

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.